By request from Caroline:
Can you please do an article on what type of entity to start with? I have emailed a few CPA’s, and my only response is, “Come to my office, and we will chat. It will costs about $500”. I just want a general what is best for a one woman photography business. Perhaps just to point me in the right direction. Sole proprietor, LLC, Scorp?
My initial response to Caroline was that I can certainly research and write a comparison between the three, but I can’t offer advice. I would recommend that if you are struggling with choosing which direction to go, you should go ahead and make an appointment with a CPA.
Sole Proprietor – Being a sole proprietor does not require any special paperwork. If you own a business and claim the income on your personal income taxes, you are a sole proprietor. The downside to being a sole proprietor is that in the event your business goes belly-up or you are unable to pay your vendors, they can sue you personally and your personal assets (your home, personal bank accounts, car etc) can be seized and sold to satisfy your business debt. In the eyes of the law, the owner and the business are one and the same and all business finances are reported to the IRS via form 1040 with a Schedule C.
LLC – LLC stands for Limited Liability Company. Forming an LLC limits your personal liability and in the event your business fails, you can normally keep your house and other personal assets and only the assets of the business can be used to satisfy any outstanding debt. Similar to a sole proprietorship, the business profits are reported in personal tax returns to the IRS. The important part to keep in mind with an LLC is that you MUST behave as if it is a separate legal entity and you MUST NOT treat it as an extension of your personal affairs. You must always make sure that you have enough money to fund the business and must invest in it properly. If the business fails and it is discovered that you did not treat it as a separate entity, your personal assets COULD be used to satisfy the debt that you have incurred. It is important that you get a Federal Tax ID number and maintain business checking accounts for your business. LLCs are formed by going through the state in which you live. LLC owners are also subject to self-employment taxes.
S Corp – In an S Corporation, the business pays taxes on any profits it makes and the partners/owners only claim on their personal taxes any payments that they receive from the S Corp. Owners can also report any business losses on their personal tax forms. Owners are not subject to self-employment tax.
This has been a general overview of the definitions of the different entities. It should NOT be used to help make your decision.
I am not a CPA, I have never played a CPA in a movie and I’ve never photographed a CPA.
I strongly encourage you to hire that CPA for $500 and get qualified guidance. We constantly tell people to hire a professional photographer for their portraits – so let’s play this game right and pay the proper professional to get the proper guidance. Do not try and make this decision on your own and do not rely on Wootness!™ for legal or financial guidance.
The information for this article was gleaned from the following:
http://www.nolo.com/legal-encyclopedia/sole-proprietorship-basics-29694.html
http://www.nolo.com/legal-encyclopedia/s-corporation-facts-30002.html
Well, you might not have photographed a CPA… but you HAVE photographed someone who WORKS for a CPA! 🙂 It’s like 6 degrees to Kevin Bacon.
Anyhow, as I’ve been in the business of working with accountants for years, I can say Yes, great general advice but yes, you do need to just set up an appointment and discuss with a CPA what your needs are. Many of them also offer business consulting on top of “here’s your tax return for the year.” Also, some of them are very flexible. If you explain you are just starting out, say, “What can you do for me?” You’d be surprised how many times you can get a break if you ask for one.
Thank you Candice for that information!